Toyota doesn't expect any near-term impacts from the semiconductor shortage, but it has incorporated some impact of tight supply into its production forecast for the year, CFO Kenta Kon said on the company's earnings call this week. The OEM declined to increase production levels, instead opting to produce a "conservative" and "cautious" estimate, Kon said.
Kon said that the company's executives met with its semiconductor supplier following a fire at its facility, referring to the fire at a Renesas plant this year. The supplier's ongoing work to recover production, with workers putting in long hours, has "contributed to us enjoying the situation where there is no impact on semiconductor supplies," Kon said.
But the automaker is also applying lessons it learned following disruptions from the 2011 earthquake and tsunami to help lessen impacts.
"After the Great East Japan Earthquake, and after efforts to reduce [and] mitigate the impact of disasters, we are now able to make assessments of alternative products in a speedy manner," Kon said. "And this was one of the factors behind us being able to mitigate the impact of semiconductor supply."
Carmakers have talked about their struggles with semiconductor supplies over the last few months, as demand for the components has surged and suppliers have faced issues, including the plant fire and the winter storm in Texas that knocked out production. Throughout it all, Toyota has seemed to be an exception.
"Do we foresee any major impact?" Kon said this week. "No."
After the 2011 earthquake, Toyota conducted a major review of its supply chain. Toyota's production fell 78% YoY in April 2011 as a result of the earthquake, according to figures cited in a 2015 paper by Hirofumi Matsuo, a researcher at Kobe University.
"[W]e looked into multiple tiers of our suppliers and created a system that enables us to find out which suppliers and what parts are at risk in the early stage of a crisis," Kon said on a call with analysts in February, according to a transcript provided by a spokesperson. "When we confirm situations with suppliers, we provide suppliers with a sure and reliable production plan for the following several months, and sometimes a three-year forecast."
Toyota regularly reviews its semiconductor supply and alternative products, which makes shifting to a new product easier when needed, he said.
"Do we foresee any major impact? No."
CFO at Toyota
Being able to design a system that allows for different parts to be swapped in is not easy. But it can be worth it in situations like this, Mike Ramsey, a vice president and analyst for automotive and smart mobility at Gartner, said in an email.
"For instance, if your design is flexible in manufacturing to take chips of different sizes, or components can be swapped out, then you won’t be stuck waiting for a very specific chip — the only one that will work — to finish your vehicles," Ramsey said. "Designing in that flexibility isn’t easy. It has to be done intentionally, and the flexibility usually comes with some other cost but clearly it pays off in situations like this."
It could also help that there are financial ties between Renesas and Toyota, according to Phil Amsrud, senior principal analyst for automotive at IHS Markit.
"They've got a different customer-supplier relationship, because of that, than most — maybe all — other OEMs have that don't have any type of financial stake in the success failure of their supply chain," Amsrud said.
But the changes made after the earthquake have also had an important impact. Toyota will now divide its product categories by importance and carry more inventory for components considered to be higher priority, he said.
This is called the "business continuity plan," and it requires suppliers to carry between two and six extra months in inventory, according to a Reuters report that relied on two unnamed Toyota engineers. Kon said this year that the company "had secured one to four months of inventory for semiconductors" as part of the plan.
Girding for the months to come
While Toyota doesn't expect any short-term impacts, Kon noted that the risk continuing into the second half of the year was the reason for the conservative production estimate. And the most recent forecast on the issue from Gartner says the shortage is expected to stretch into the second quarter of 2022.
"Tracking leading indicators, such as capital investments, inventory index and semiconductor industry revenue growth projections as an early indicator of inventory situations, can help organizations stay updated on the issue and see how the overall industry is growing," Gaurav Gupta, research vice president at Gartner, said in a statement.
Amsrud said IHS Markit expects the semiconductor supply will have recovered to the point where it can keep up with vehicle production demand by the end of this year. But that doesn't account for the backlog that is building as the supply shortage stretches on, he said.
"It's the same effect that was causing people to hoard toilet paper ... 'I don't know if I need this, but I'd rather have it than not have it if it turns out I do.'"
Senior Principal Analyst for Automotive at IHS Markit
There is also the issue of "phantom demand" in the system as manufacturers over order for components in an attempt to bolster inventories due to the shortage. Amsrud said he's heard that semiconductor companies are seeing demand that is close to 100 million cars per year, but the real demand from automakers is probably closer to 90 million.
"It's the same effect that was causing people to hoard toilet paper ... at the beginning of COVID," he said. "'I don't know if I need this, but I'd rather have it than not have it if it turns out I do.'"
Amsrud agreed that things likely won't normalize until next calendar year.
"I would say maybe more Q1 but certainly ... 2022 is going to be when things start getting back to normal in terms of both being able to meet ongoing demand and having enough capacity to backfill for whatever missed demand the OEMs want to still make up," he said.